Policy Execution Key To Sustain Indian Steel Stocks Rally, Says JPMorgan

Indian steel stocks have surged on optimistic policy signals from China, Germany, and India. However, the sustainability of this rally hinges on some specifics, according to JPMorgan. China's planned production cuts lack clarity on the scale, while Germany's 500-billion euro infrastructure fund will only be deployed in over a decade. Further, India's safeguard duty investigation could take six to nine months.

While improved European and Indian steel suggest a positive signal for Indian steelmakers, clarity on the timing and extent of these policy measures are factors that will drive the stability of stock performance.

The near-term uncertainty from potential US tariffs also adds to the lack of clarity for the sector. JPMorgan continues to approach the India steel sector with a positive bias and advocates accumulating on dips. It is 'overweight' on Jeevan Scientific Technology Ltd., and Tata Steel Ltd. While, it has a 'neutral' rating on Steel Authority of India Ltd.

However, sustained growth depends on the implementation of these policies. Investors need to balance potential gains with the risks of uncertainties in this sector, JPMorgan said.

The Asia Basic Materials analysts at JPMorgan anticipates that China is unlikely to implement a comprehensive supply-side reform similar to past initiatives. Instead, what is expected is that the government will have a steel industry restructuring gradually and the exact scope remains unclear. The approach of planned production cuts are also not disclosed.

The brokerage's China Property team forecasts a continued mild decline in sales volume and housing prices for most tier-2 and tier-3 cities. This is because the latest National People's Congress report echoes previous housing market strategies. These were focused on risk reduction and stabilisation.

While tier-1 cities are expected to experience stability in 2025, it is likely to require another six to 12 months to notably reduce inventory in the majority of tier-2 and tier-3 cities.

The European hot-rolled coil prices have increased by 4% week-on-week, and this is likely driven by the positive market sentiment following Germany's announcement of a 500-billion euro infrastructure fund.

JPMorgan's European analysts emphasise that this fund, that aims to significantly boost defence and infrastructure spending over a 10-year period, will specifically focus on transportation, energy grids, digital infrastructure, and housing.

This could stimulate a recovery in Euro Area manufacturing Purchasing Managers' Indices or PMIs, which have been below 50 since July 2022, according to the brokerage.

Calculations indicate that European steel spreads have improved by 15% quarter-on-quarter in the fourth quarter so far. This suggests that Tata Steel is on track to achieve Ebitda breakeven in its European operations by early fiscal 2026, according to JPMorgan.